February 24th, 2003, 2:04 pm
Despite the claims to the contrary, most BGM models are definitely Markovian.A markovian model is one in which, at any pont in time, the entire state of the model is a function of the value of a finite number of "state variables".This is a useful because the value V of most options is also a function of the same state variables.There was a claim (with rigorous proofs seen in some text books) that the only Markovian models are the seperable models of Li, Ritchken, and Sankarsubramanian (pardon me Sankar, I still can't spell your name), but this turns out not to be the case.